By Kevin Yao and Megha Rajagopalan
BEIJING (Reuters) - President Xi Jinping's crackdown on Chinese government extravagance has emptied top-end restaurants and dented the sale of expensive food and drink, putting downward pressure on the world's second largest economy.
High-end caterers in Beijing and other big cities have borne the brunt of Xi's austerity drive, which he launched in November in an attempt to tackle pervasive corruption and allay criticism of the lifestyles led by some officials.
As the number of lavish official banquets has dwindled, the sale of pricey delicacies such as sea cucumbers and abalone has plunged, suppliers said.
Late last month, unlisted restaurant chain Merrylin closed its flagship outlet in western Beijing - the location of central government ministries and offices.
"We had to shut down due to heavy losses. The business was difficult to maintain as the restaurant had been relying on government spending," said Zhou Guihong, a manager at Merrylin.
Some 130 workers, including Zhou, have lost their jobs. The 4,000-square-metre restaurant had 38 banquet rooms.
Xiangeqing, China's first privately owned restaurant group to go public, posted a net loss of 68.4 million yuan ($11 million) in the first quarter, in contrast to a 46.2 million yuan profit in the same period last year.
Annual sales growth of the catering sector slowed sharply to 8.5 percent in the first quarter from 13.6 percent in the whole of 2012. Sales for large caterers dipped 2.6 percent in the first quarter, compared to a 12.9 percent rise last year, official data showed.
That put a drag on China's consumption, with annual retail sales growth slowing to 12.4 percent in the first quarter from 14.3 percent over all of 2012.
A raft of data this week is also likely to show subdued factory and investment growth in April, following surveys that showed the weakness in China's manufacturing sector is spreading to the services sector, which makes up almost half of gross domestic product.
At the same time, the frugality campaign has raised optimism of increased private consumption over the longer term, which could put China on a more sustainable economic footing.
The anti-corruption drive could cut bloated government consumption, which accounts for an estimated 15 percent of GDP, and increase state spending on underfunded social welfare systems.
This would give ordinary Chinese more confidence to spend money instead of saving large chunks of their income for medical bills and other emergencies, analysts say.
Household consumption in China is about 35 percent of GDP - the lowest among major economies and less than half of that in the United States.
"It's negative for the economy in the near term, particularly in terms of government consumption. But it could be positive in the long term," said Haibin Zhu, chief China economist at JPMorgan Chase in Hong Kong.
FEELING THE PINCH
Many high-end restaurants are now offering cheaper dishes.
Meng Kai, Xiangeqing's founder and chairman, said in February his company would shift from high-end catering to the mass market. Xiangeqing's shares have fallen by around a third since mid-January.
The catering slowdown is spilling over to gourmet food and expensive liquor and cigarettes - all mainstays at alcohol-fuelled official banquets.
Seafood wholesalers in the Fengtai district of Beijing said the price of sea cucumbers, once a ubiquitous and notoriously expensive banquet staple, had dived.
"It's because our country's leader has issued rules saying government officials cannot eat this kind of thing anymore, or give them as presents," said a wholesaler surnamed Zhu, gesturing to rows of dried sea cucumber gift boxes, which once sold for thousands of yuan each, now gathering dust on his shelves.
Eating and drinking together is an indispensable part of Chinese elite culture as business deals are usually discussed and sealed at the dining table.
Xi has made battling corruption a top task of his administration, warning the problem is so severe it could threaten the ruling Communist Party's survival.
"This is a campaign against conspicuous consumption. It will go on for the foreseeable future," said Willy Lam, a China politics specialist at the Chinese University of Hong Kong.
But Xi may have to take bolder steps to reduce the government's role in the economy - the root cause of widespread official rent-seeking and corruption, analysts say.
"This (austerity) is a good start but reforms are needed. We don't need to worry about the downward pressure on the economy," said Xu Hongcai, senior economist at the China Center for International Exchange, a government think tank. ($1 = 6.1667 Chinese yuan)
(Editing by Dean Yates)